20081203Miller Rebuttal.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AND CHAGES FOR ELECTRIC SERVICE.
CASE NO. IPC-E-08-10
IDAHO POWER COMPANY
DIRECT REBUTTAL TESTIMONY
OF
CATHERINE M. MILLER
1 Q.Please state your name.
2 A.My name is Catherine M. Miller.
3 Q.Are you the same Catherine Miller that
4 presented direct testimony in this proceeding?
5 A.Yes.
6 Q.What issues will you be responding to in
7 your rebuttal testimony?
8 A.As described in my direct testimony on pages
9 5-6, with Commission concurrence, Idaho law now allows the
10 Company an opportunity to earn and collect its authorized
11 return on Construction Work in Progress ("CWIP") by
12 including CWIP in base rates. In Idaho Power's 2008
13 general rate case filing, the Company has requested that
14 $7.6 million be included in base rates to fund the ongoing
15 financing costs associated with the Hells Canyon
16 relicensing proj ect. The Company appreciates Staff's
17 agreement with the Company that the expense balance
18 associated with the allowance for funds used during
19 construction ("AFUDC") from the Hells Canyon relicensing
20 effort is growing at an alarming rate and that collecting
21 AFUDC related to the Hells Canyon relicensing project in
22 current rates is in the public interest.
23 My rebuttal testimony explains why the Company's
24 methodology for forecasting 2009 AFUDC for Hells Canyon
MILLER, DI REB 1
Idaho Power Company
1 relicensing better reflects 2009 AFUDC expense expectations
2 than Staff Witness Vaughn's recommended methodology. I
3 will respond to Ms. Vaughn's proposal to accrue interest at
4 the same rate as AFUDC booked as CWIP for financial
5 reporting purposes. I will explain why Staff Witness
6 Vaughn's proposal to stop accruing AFUDC on Hells Canyon
7 relicensing CWIP at December 2009 is both unnecessary and
8 unwise. In response to Dr. Peseau' s testimony, i will
9 discuss the Company's proposed ratemaking treatment for the
10 AFUDC proposal and how it benefits customers. And,
11 finally, i will respond to Staff Witness Vaughn's proposal
12 that the Company request Commission authority to place the
13 Hells Canyon relicensing proj ect in base rates before a
14 permanent license is granted by the Federal Energy
15 Regulatory Commission ("FERC").
16 AFC AMOUNT TO BE COLLECTED
17 Q.Staff Witness Vaughn recommends on page 4 of
18 her testimony that the Commission deny $2,881,849 of the
19 Company's proposed collection of AFUDC associated with
20 financing the Hells Canyon relicensing CWIP. What is your
21 understanding of the basis for this proposed denial?
22 A.Ms. Vaughn's testimony confirms that Staff
23 essentially agrees with the Company that collecting Hells
24 Canyon relicensing AFUDC in the base rates established in
MILLER, DI REB 2
Idaho Power Company
1 this case is in the public interest. Ms. Vaughn's
2 adjustment is the result of using a different approach than
3 the Company's to estimate the amount to be included in base
4 rates.
5 Q.Do you agree with Ms. Vaughn's recommended
6 adjustment?
7 A.No. Two items drive Ms. Vaughn's adjustment
8 to the Company's methodology:(1) Ms. Vaughn's selection
9 of the time period used to estimate the 2009 AFUDC rate and
10 (2) Ms. Vaughn's approach to extending the resulting AFUDC
11 amount to 2009. Neither item provides an accurate estimate
12 of 2009 AFUDC expenses.
13 Q.Please describe the method Ms. Vaughn used
14 to forecast the AFUDC rate for 2009.
15 A.As described on page 15 of her testimony,
16 Ms. Vaughn has proposed using the average of January 2008
17 through August 2008 actual AFUDC rates to proj ect a
18 December 2008 AFUDC amount equal to $396,191. Staff then
19 multiplied that $396,191 amount by twelve to create a
20 forecast AFUDC amount of $4,754,292 for 2009. The Company
21 requested that $7.6 million be included for 2009.
22 Q.Why do you believe Staff Witness Vaughn's
23 method of forecasting the appropriate AFUDC rate is
24 incorrect?
MILLER, DI REB 3
Idaho Power Company
1 A. Staff's calculation is inappropriate for
2 three reasons. First, by using only January 2008 through
3 August 2008 AFUDC rates, Staff's methodology has not
4 appropriately captured the impact on AFUDC rates of
5 changing short term debt balances. These changes are due
6 to the seasonality of cash flows and the timing of long
7 term debt issuances. Second, by using less than a full
8 year's data, Staff's methodology fails to recognize the
9 increases in borrowing costs that have occurred since
10 August as a result of the current financial crisis. This
11 failure to recognize current conditions is a critical flaw
12 in the Staff's proposed AFUDC rate assumption. Finally,
13 Staff's methodology ignores the compounding issue that both
14 Staff and the Company agree is of concern. I will discuss
15 the compounding issue in greater detail later in my
16 rebuttal testimony.
17 Q.How are AFUDC rates determined?
18 A.The actual AFUDC rate is calculated using a
19 rate methodology followed by the Idaho Commission. This
20 rate is determined by applying a formula developed and
21 approved by the FERC.(CFR 18, Part 101, Subchapter C,
22 Electric Plant Instruction 3 (A) (17), as amended by a FERC
23 letter dated December 30, 1981). Because the FERC formula
24 includes average short term debt balances and interest
MILLER, DI REB 4
Idaho Power Company
1 rates in its calculation, the resulting AFUDC rate is
2 impacted by changing short term borrowing balances
3 resul ting from such things as short term cash needs for net
4 power supply expenses or from the timing of long term debt
5 or equity issuances that are necessary to support
6 construction expenditures.
7 Q.What are the AFUDC rates for 2008 through
8 October 2008?
9 A.The following schedule lists the AFUDC rates
10 used in Ms. Vaughn's calculation, the AFUDC rates that were
11 in effect through October 2008, the average short term debt
12 balances used for calculating AFUDC rates, and the related
13 short term debt rates.
14 AFC Rate Average Short
used by AFC Rate Term Debt Short TermStaffinEffect($millions)Debt Rate
Jan-08 6.352%6.352%$140.9 5.0%
Feb-08 5.592%5.592%$151.0 4.0%
Mar-08 4.111%4.111%$177.0 3.5%
Apr-08 4.136%4.136%$196.0 3.3%
May-08 3.696'%3.696%$200.6 3.2%
Jun-08 3.016%3.016%$209.5 3.0%
Jul-08 4.894%4.894%$148.2 3.2%
Aug-08 6.276%6.271%$82.1 3.3%
Sep-08 4.759%6.240%$100.7 4.1%
Oct-08 4.759%6.585%$159.3 6.1%
Nov-08 4.759%Na Na Na
Dec-08 4.759%Na Na Na
MILLER, DI REB 5
Idaho Power Company
1 Q.What does this chart portray regarding
2 changes in the AFUDC rates?
3 A.This chart demonstrates how current
4 operating conditions and the timing of long term debt or
5 equi ty issuances impact average short term debt balances
6 which in turn impacts the AFUDC rate.Increas ing short
7 term debt balances and low short term debt rates caused the
8 downward trend in the AFUDC rate from January 2008 through
9 June 2008. As stated in the Company's September 30, 2008,
10 10Q filed with the SEC, Idaho Power issued $120 million of
11 its 6.025 percent First Mortgage Bonds, Secured Medium-Term
12 Notes, Series H, due July 15, 2018, on July 10, 2008.
13 Idaho Power used the net proceeds of that issuance to pay
14 down short term debt. As a result, the AFUDC rates began
15 rising in July. As noted in Mr. Steve Keen's rebuttal
16 testimony on page 8, the Company has experienced
17 significant increases in commercial paper rates. Rates
18 increased from roughly 3 percent in the summer to more than
19 6 percent in October. By October 2008, the effective AFUDC
20 rate equaled 6.585 percent.
21 Q.Considering current conditions, is it
22 appropriate to use the average of January 2008 through
MILLER, DI REB 6
Idaho Power Company
1 August 2008 AFUDC rates (4.759 percent), as Staff has done,
2 to forecast 2009 AFUDC on Hells Canyon relicensing CWIP?
3 A.No. The AFUDC rate used for forecasting
4 2009 should be a rate that is expected to be in place at
5 the time rates are in effect. By using a partial year for
6 proj ections, Staff has not appropriately captured the
7 impact of changing short term debt balances due to the
8 seasonality of cash flows and the timing of long term debt
9 issuances and increasing costs of short term debt. As a
10 result, Staff's estimated AFUDC rate calculated at 4.759
11 percent based on the average of the first eight months of
12 2008 is too low.
13 Q.What AFUDC rate do you support for
14 forecasting 2009 AFUDC?
15 A.I continue to support the AFUDC rate
16 presented in my original testimony, which was the average
17 2007 AFUDC rate of 7.19 percent. This rate is a reasonable
18 estimate of the AFUDC rate to be used for 2009 as it uses a
19 full year in its determination.
20 Q.Putting the selection of the appropriate
21 AFUDC rate aside, do you agree with the methodology Staff
22 used to calculate 2009 estimated AFUDC?
23 A.No. On page 15 of her direct testimony, Ms.
24 Vaughn describes Staff's methodology used to estimate 2009
MILLER, DI REB 7
Idaho Power Company
1 AFUDC. Beginning with December 31, 2007, Hells Canyon CWIP
2 balances, Staff calculates the monthly AFUDC amount then
3 adds it to the CWIP balance to calculate the following
4 month's AFUDC. This is commonly referred to as
5 "compounding." Staff proceeds in this manner through
6 December 2008. To project the 2009 AFUDC amount, Staff
7 simply takes the projected December 2008 AFUDC dollar
8 amount and multiplies it by twelve. By following this
9 methodology, effectively, Staff has ignored the compounding
10 of 2009 AFUDC that both Staff and the Company agree is of
11 concern.
12 STOPPING AFC IN DECEMER 2009
13 Q.Do you agree with Staff's proposal to stop
14 calculating and accruing AFUDC on Hells Canyon relicensing
15 costs at the end of December 2009?
16 A.No. The Company disagrees with Staff's
17 proposal to stop AFUDC for the following reasons. First,
18 Ms. Vaughn's proposal is the result of her incorrect
19 conclusion that the Company is incented to slow down the
20 relicensing process in order to accrue more AFUDC. The
21 fallacy of that argument is demonstrated by Ms. Vaughn's
22 direct testimony. She points out on page 18 that the
23 Company has little direct control over when FERC will issue
24 a permanent license; therefore, the existence of any
MILLER, DI REB 8
Idaho Power Company
1 theoretical incentive or disincentive to slow things down
2 or speed them up is irrelevant. Finally, if accrual of
3 AFUDc were to stop on December. 2009, as Ms. Vaughn
4 proposes, and the Company has not received the permanent
5 license from FERC necessary to close the proj ect to plant
6 in service and include its cost in rate base, the Company
7 will be denied the opportunity to earn a fair, just, and
8 reasonable return on its investment.
9 Q.Why wouldn't the Company be incented to
10 delay completion of the Hells Canyon relicensing proj ect if
11 the AFUDC accrual continued past December 2009?
12 A.The Company is highly motivated to complete
13 this proj ect and begin recovering what has become an
14 extraordinarily large investment balance. As of December
15 31, 2007, Hells Canyon relicensing costs recorded in CWIP
16 equaled $95.6 million. The Company has continued to incur
17 relicensing costs and as of October 31, 2008, the CWIP
18 balance equaled $103.3 million. It is important to
19 remember that accrued AFUDC does not provide the Company
20 with cash to pay its bills. As a result, Idaho Power is
21 quite eager to include this large sum in rate base as soon
22 as possible given that the Company has funded this
23 relicensing effort since 1999 without reimbursement.
MILLER, DI REB 9
Idaho Power Company
1 That said, it is important not to lose sight of the
2 fact that in this case, the Company is only asking to
3 collect estimated 2009 AFUDC financing costs and is not
4 seeking to recover its original investment at this time.
5 The collection of 2009 AFUDC will be recorded as a
6 Regulatory Liability and, therefore, does not contribute to
7 the Company's profitability. Rather, it provides cash flow
8 to improve cash flow coverage ratios that are necessary to
9 maintain Idaho Power's credit strength and its ability to
10 access external markets for funding construction
11 activities.
12 Q.In Ms. Vaughn's response to Idaho Power's
13 Production Request No. 34, she asserts that the Company
14 will experience "enhanced" cash flows because the AFUDC
15 included in rates will be grossed up for taxes. Is she
16 correct?
17 A.No. This is simply not true. The resulting
18 tax expense will be deferred so as to have a zero impact on
19 the Company's income statement; however, the Company will
20 currently pay income taxes on the amount collected.
21 Q.Can the Company predict with certainty when
22 FERC will issue a permanent license?
23 A.No. The Company agrees with Ms. Vaughn that
24 the Company has little direct control of when a permanent
MILLER, DI REB 10
Idaho Power Company
1 FERC license will be received. The FERC licensing process
2 is extraordinarily complex both in its scope and large
3 number of participants. In addition, the recent change in
4 the administration at the national level may prolong the
5 process even further. Although Ms. Vaughn states that a
6 permanent license could be received as early as January
7 2009, the Company does not believe a permanent FERC license
8 could be received prior to January 2010. Because the
9 Company has little direct control over when the permanent
10 license is received (and thus when AFUDCaccrual would
11 naturally be stopped according to generally accepted
.12 accounting principles ("GAAP")), it does not matter whether
13 or not there is any theoretical disincentive to complete
14 the proj ect .
15 Q.Please elaborate on your prior statement
16 that if accrued AFUDC on Hells Canyon relicensing were
17 stopped at December 2009, the Company will not have an
18 opportunity to earn a fair, just, and reasonable return.
19 A.While I am not an attorney, my understanding
20 of Idaho Code § 6l-502A is that absent a finding that CWIP
21 recovery is in the public interest, the Commission must
22 allow the Company to accrue a just, fair, and reasonable
23 AFUDC computed in accordance with GAAP. As discussed in my
24 direct testimony, in this case Idaho Power is not
MILLER, DI REB 11
Idaho Power Company
1 requesting the inclusion of CWIP in rate base to currently
2 earn and collect its return. Rather, the Company is
3 requesting that it be gi vert the opportunity to recover
4 estimated financing costs at the same time they are
5 expected to be incurred in 2009. This collection would be
6 recorded as a Regulatory Liability. The Company "earns"
7 its return through the accrual of AFUDC on Hells Canyon
8 relicensing CWIP. If accrued AFUDC were stopped on
9 December 2009 as Ms. Vaughn proposes and the Company had
10 not yet received a permanent license from FERC necessary to
11 close the project and include it in rate base, the Company
12 will not have an opportunity to earn a fair, just, and
13 reasonable return. My attorney advises me that this could
14 resul t in an unlawful taking of assets to which the Company
15 is entitled. Such a result would be particularly egregious
16 given the $103.3 million Idaho Power has spent on Hells
17 Canyon relicensing thus far.
18 CACULTION OF ACCRUED INTEREST
19 Q.Do you agree with Staff's proposal to accrue
20 interest on the Regulatory Liability at the same rate as
21 AFUDC is recorded as CWIP for financial accounting
22 purposes?
23 A.Partially. The Company agrees that accruing
24 a carrying charge based on the same rate as AFUDC is
MILLER, DI REB 12
Idaho Power Company
1 recorded as CWIP for financial accounting purposes is
2 reasonable in this instance. The Company agrees with Ms.
3 Vaughn that the most appropriate rate is the actual AFUDC
4 rate used for financial accounting purposes. However, to
. 5 properly match the AFUDC accrued on CWIP, the balance on
6 which the carrying charge is calculated must contain all
7 components that would be included in rate base, including
8 tax accounts. In this manner, the results would match the
9 compounded AFUDC accrued for CWIP purposes.
10 Q.Do you agree with Dr. Peseau' s assertion
11 that if the Commission accepts your proposal for recovering
12 2009 AFUDC, customers would only get a "Regulatory Asset"
13 amortized over the life of the plant asset which amounts to
14 a 30 year unsecured loan at 0 percent interest?
15 A.No. Dr. Peseau apparently does not
16 completely understand what I am proposing. First, the
17 collection of AFUDC would not be recorded as a "Regulatory
18 Asset" as Dr. Peseau states. In my direct testimony on
19 page 13, I discuss the Company's proposed regulatory
20 treatment. The Company proposes that the collection of
21 AFUDC would be recorded as a Regulatory Liability. When
22 the Company requests that the Hells Canyon relicensing
23 project be placed in rate base, the associated Regulatory
24 Liability will be included as a reduction to rate base.
MILLER, DI REB 13
Idaho Power Company
1 Q.Dr. Peseau characterizes your proposal as an
2 unsecured loan at 0 percent interest from customers to the
3 Company. Is that an accurate description of how your
4 proposal would operate?
5 A.No. Using the "loan" analogy, a more
6 accurate way to describe what the Company is recommending
7 is that customers pay estimated "interest" costs as they
8 are being incurred. As a result, the eventual final "loan"
9 balance (future rate base) is lower, thereby reducing
10 customers' future "interest" and "principle" payments for
11 the rate base asset. Analogous to ratemaking, the benefit
12 can clearly be seen with an example of a consumer loan.
13 In this example, assume a consumer borrows $100.00
14 at 8 percent. The term of the loan is for 10 years but the
15 consumer is not required to begin paying back the loan
16 until 5 years have passed. The consumer is then given the
17 choice of paying interest costs as they are incurred or
18 paying interest costs when principle payments begin. As is
19 demonstrated below, if the consumer pays the interest as it
20 is incurred, the consumer's total payments equal $165.23 or
21 $18.77 lower than the $184.00 he would have otherwise paid.
MILLER, DI REB 14
Idaho Power Company
1
Paying Interest as Delaying Interest
Incurred PaymentsInterestInterestatat
Payments 8 percent Balance Payments 8 percent Balance
Year 0 100.00 100.00
Year 1 (8.00)8.00 100.00 8.00 108.00
Year 2 (8.00)8.00 100.00 8.64 116.64
Year 3 (8.00)8.00 100.00 9.33 125.97
Year 4 (8.00)8.00 100.00 10.08 136.05
Year 5 (8.00)8.00 100.00 10.88 146.93
Year 6 (25.05)8.00 82.95 (36.80)11. 75 121. 89
Year 7 (25.05)6.64 64.55 (36.80)9.75 94.84
Year 8 (25.05)5.16 44.66 (36.80)7.59 65.62
Year 9 (25.05)3.57 23.19 (36.80)5.25 34.07
Year 10 (25.05)1. 86 0.00 (36.80)2.73 0.00Total
Payment ($165.23)($184.00)
2 Q.Does this conclude your rebuttal testimony?
3 A.Yes, it does.
MILLER, DI REB 15
Idaho Power Company